For Bank of America, Dealmaking to Turn the Page

By — on / Dealmaking

Negotiation often marks a new beginning: of a partnership, a project, or employment relationship. At other times, the goal of dealmaking is as much about reaching an ending as it is about moving forward.

That’s the attitude with which Bank of America wrapped up its settlement negotiations with the Department of Justice (DOJ) last month. For years, the bank has faced investigations and litigation related to mortgage lending in the years leading up to the 2008 financial crisis. Its talks with the DOJ were contentious and stalemated over the course of months.

The DOJ flatly rejected a cash offer of $3 billion from the bank, countering with a demand for more than $10 billion. With the two sides far apart, the DOJ began preparing a lawsuit, the New York Times reports. This threat motivated Bank of America to bump its offer up to $4 billion.

Government lawyers remained unimpressed, even after the bank delivered what it believed to be a knockout offer of $7 billion in cash and $14 billion overall.

The two sides were locked in a disagreement over Bank of America’s responsibility for the mortgage misdeeds. The bank argued it should not be held accountable for mortgage securities sold by Merrill Lynch and Countrywide Financial Corp., which Bank of America purchased as they collapsed during the housing crisis. But federal prosecutors said the bank had profited from Merrill and purchased Countrywide without any pressure from the government.

The impasse finally ended in August, after a judge ruled against Bank of America in another case, ordering it to pay nearly $1.3 billion for selling thousands of defective loans. That outcome led the bank’s top lawyers to believe Bank of America could ill afford another protracted courtroom battle.

Confronted with an ultimatum from U.S. attorney general Eric Holder to raise its offer or be sued the very next day, the bank backed down, offering $9 billion in cash and more than $7 billion in consumer relief.

The final settlement of nearly $17 billion—the largest ever negotiated between the U.S. government and a single company—roughly equals Bank of America’s total profit for the past three years, the Wall Street Journal reports. Despite the size of the blow, Bank of America CEO Brian Moynihan expressed relief that the last of the bank’s lingering financial-crisis problems would finally be behind it.

The negotiations and outcome mirror the $7 billion settlement recently reached between the DOJ with Citigroup on similar charges of mortgage fraud. In those negotiations as well, the two parties remained billions of dollars apart until the threat of an imminent lawsuit brought them together.

Negotiators often are reluctant to walk away from their entrenched positions, believing they have invested too much to quit. But sometimes the wisest course is to recognize when one’s BATNA (best alternative to a negotiated agreement) is worse than the offer on the table. In such cases, rational negotiators move swiftly to wrap up the deal with the aim of shedding off past mistakes and making better decisions in the future.

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